What Is a Revaluation?

What Is a Revaluation?

Let me explain what a revaluation is: it's an upward adjustment to a country's official exchange rate relative to a chosen baseline, which could be wage rates, the price of gold, or a foreign currency. You should know that revaluation is the opposite of devaluation, where the exchange rate gets adjusted downward.

Revaluations can change the exchange rate between countries and affect the values of foreign-held assets, meaning those assets need to be revalued. More broadly, they influence not just asset valuations but also international trade and domestic economic conditions.

For context, the United States switched from a fixed to a floating exchange rate in 1973, allowing the rate to fluctuate based on the currency market. In 2005, China revalued its fixed-rate currency and pegged it to a basket of world currencies.

How Currency Revaluation Impacts Exchange Rates and Economies

In a fixed exchange rate regime, only a decision by a country's government, like its central bank, can alter the official value of the currency. Developing economies often use this system to limit speculation and maintain stability.

Floating rates are different; they change regularly based on currency market fluctuations. The U.S. used a fixed exchange rate until 1973, when President Richard Nixon took the country off the gold standard and introduced a floating rate. Even though China has an advanced economy, its currency has been fixed since 1994. Before 2005, it was pegged to the U.S. dollar, and after revaluation, it shifted to a basket of world currencies.

How Revaluations Alter Currency Value and Asset Valuation

Revaluations affect both the currency in question and the value of foreign-held assets in that currency. They can change exchange rates between countries, requiring adjustments to the book values of those assets.

For example, if a foreign government sets 10 of its currency units to equal $1, revaluing might change it to five units per dollar. This makes its currency twice as expensive compared to U.S. dollars.

If that revaluation happens, any assets held by a U.S. company in the foreign economy would need revaluing. Say an asset held in foreign currency was previously valued at $100,000 based on the old rate; after revaluation, its value would adjust to $200,000. This reflects the new value in the home currency, accounting for the currency's revaluation.

Factors Leading to Currency Revaluation

Currency revaluation can be triggered by various events. Common causes include changes in interest rates between countries and large-scale events that affect an economy's profitability or competitiveness. Changes in leadership can also cause fluctuations, as they might signal shifts in market stability.

Speculative demand plays a role too. For instance, in 2016, before the Brexit vote on whether Britain would stay in the EU, speculation led to fluctuations in multiple currencies. Since the outcome was unknown, actions based on possibilities were speculative.

What Is the Effect of a Currency Revaluation?

A currency revaluation increases the value of a currency relative to others. This makes buying foreign goods in foreign currencies cheaper for domestic importers. On the flip side, domestic exporters may see less business because their goods become more expensive for foreign buyers.

Is Currency Revaluation Good or Bad?

Currency revaluation is usually good for the country doing it, as it boosts the currency's value. But exchange rates are bilateral, so one currency's gain is another's loss. Since the world is connected, these changes can have wide-reaching effects on imports and exports. While it strengthens the currency, it can make goods more expensive and hurt export levels.

How Can a Country Increase the Value of Its Currency?

Currencies are influenced by many factors. A country can improve its currency by buying its own currency and selling foreign exchange assets. It can also raise interest rates, reduce inflation, and implement supply-side policies like increasing competitiveness.

The Bottom Line

Revaluation is a key economic tool for adjusting a country's official exchange rate upward relative to a benchmark, such as another currency or wage rates. It can be triggered by interest rate changes, major economic events, or speculative demand. Typically, it strengthens the currency and has mixed effects on imports and exports. Revalued rates can also impact the book values of foreign-held assets.

Only governments can revalue in fixed systems, while floating currencies fluctuate with markets. If you're in international trade or investing with foreign exposure, understanding revaluations is essential.